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>> WHOSE
CUSTOMER ARE YOU?
THE REALITY OF
DIGITAL BANKING//
Sponsored byG LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
CONTENTS
2 About this report
3 Executive summary
5 Section I: Envolving trends: The digital future is here
9 Section II: New business models: What do banks want to be?
10 Monzo: Aiming for seamless growth
15 Europe: Wide open
16 Section III: Digital transformation: Move fast but don’t break anything
17 A digital Greater China
20 Pepper: Starting from scratch
21 Section IV: Artificial Intelligence is watching and learning
24 Section V: Security: An increasingly global concern
25 If the face fits
27 USA: You’re next
28 Customer due diligence: Who are you?
29 Conclusion: Play to your advantages
1 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING ABOUT THIS REPORT In February-March 2018 The Economist Intelligence Unit, on behalf of Temenos, surveyed 400 global banking executives about the challenges retail banks expect to face between now and 2020, and the strategies they are deploying in response. The survey respondents were geographically diverse: 25% were drawn from Europe, 25% from the Asia-Pacific region and almost 18% were from North America. This year’s survey had our highest ever representation from emerging markets, with approximately 16% of respondents from Latin America and 16% from Africa and the Middle East. By size of their employer, the respondent base is evenly split. Half work for parent groups with assets over US$10bn, the other half work for smaller organisations, including co-operatives and community banks. In terms of seniority, 51% are at C-suite level and 10% are board members. A fifth (20%) of respondents work in finance roles, over 10% work in general management roles and 9% work in IT. Marketing, sales and customer service constitute 16% of the base. A further 6% of respondents work in information and research and 5% in research and development. In addition, in-depth interviews were conducted with 20 senior executives and experts from banks, fintech companies and security advisers. Our sincerest thanks are due to the following for their time and insight. Neil Aitken Head of communications, UK Payments Administration Tom Blomfield Chief executive officer, Monzo Josh Bottomley Global head of digital, HSBC Ray Brash Chief executive officer, PrePay Solutions Ilan Buganim Chief technology officer, Bank Leumi Hector Cardenas Co-founder/CEO, Conekta Tamara Cook Head of digital innovations, FSD Kenya Stefan Erne Chief digital officer, Handelsbanken Hakan Eroglu Executive, Digitisation in payments & banking, Accenture Andres Fontao Managing director, Finnovista Carol Hung Chief information officer, Standard Chartered Hong Kong Francisco Illescas Co-founder, Tesseract Jane Jee Chief executive officer, Kompli-Global Michel Léger Executive vice president, Innovation, Ingenico Katie Mark Senior communication manager, Competition and Markets Authority Eduardo Morelos Programme director, Startupbootcamp FinTech, Mexico City Robert Prigge Chief revenue officer, Jumio Carlos Orta Tejada Vice president, Regulatory Policy, Comisión Nacional Bancaria y de Valores Hans Tesselaar Executive director, Banking Industry Architecture Network Edoardo Totolo Research Economist, FSD Kenya Roberto Valerio Chief executive officer, RISK IDENT The report was written by Paul Burgin and edited by Renée Friedman of The Economist Intelligence Unit. 2 © The Economist Intelligence Unit Limited 2018
G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
EXECUTIVE SUMMARY
The future of banking is digital, but the human touch will remain essential in attracting new customers
for loans and complex investment products. Stakeholders must co-operate like never before to deliver
the user experience customers want while keeping their money and data safe.
This report, the fifth in The Economist Intelligence Unit’s series on the future of retail banking, marks a
significant shift in the strategic concerns of banking executives worldwide. Previous reports tracked the
shift in customer expectations and its likely impact on distribution and product design. Now the focus
is firmly on implementing open banking and dealing with its consequences.
l Technology and digital are now bigger—and more important—trends than regulation.
Changing client demand, the rise of the smartphone and the introduction of new digital technologies
have replaced post-financial crisis regulation as the drivers of strategic thinking at banks around the
world. Integrating open banking that allows apps to initiate payments and other financial transactions
is core to adapting to the digital banking age.
l No single digital strategy suits every bank in every market. Respondents say their banks are
adopting different strategies. While 61% want to develop niche propositions, others are, to varying
degrees, opening up and giving access to new third parties. Some banks will view regulatory and
technological change as opportunities to recreate themselves and build new ecosystems, while others
may simply comply with emerging norms and regulations by granting access to customer data and
payments via competitors’ smartphone apps. Going with the easiest options may leave banks, and
their products, at risk of being assimilated, aggregated and unbundled by agile competitors, leading to
a loss of brand and product visibility.
l Banks must become more agile. The development of agile products requires improved
organisational agility as well. According to 52% of survey respondents, product agility is now their
top strategic priority. New payment players and the likes of Google, Apple, Facebook and Amazon,
collectively known as GAFA, know what their clients want and are able to adapt quickly. Banks have
to keep up, restructuring their business models to ensure that new products and features can be
integrated quickly across physical and digital channels.
l The impact of open banking and tighter security and data rules—and the conflicts between
them—do not appear to be fully understood. While 71% of respondents are focusing their digital
investment on cyber security, only 17% are concerned about a third-party relationship vulnerability
being exploited as a result of open banking. The biggest danger to a sustainable banking model is the
loss of valuable data on customers’ lifestyles and needs. Without that insight, all banks will struggle to
upsell more profitable loan, investment and retirement products.
l Customer and regulator concerns about data security may limit some of the big banks’
ambitions. The larger banks can take the fintechs on by building all-encompassing platforms that
offer a seamless interaction with other products, services and comparison tools. Offering greater
functionality means banks can learn more about customer needs and tailor new products to match.
3 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
l Artificial intelligence and chatbots have a role in customer services, authentication and
fraud, but banks are taking a cautious line as they do not want to lose their customers’ trust.
Just over 20% of respondents think artificial intelligence (AI) will improve the user experience. However,
banks need to appease customers’ uncertainty about the security of their personal information and
how these data about them may be used. They will need to do this while maintaining a frictionless user
experience that still takes into account individuals’ needs.
4 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
SECTION I: EVOLVING TRENDS: THE
DIGITAL FUTURE IS HERE
“In many ways we are already a digital bank.” Josh Bottomley, global
head of digital, HSBC
Smartphones, e-wallets and contactless technology are already displacing the branch, ATM, online
PC banking portal and call centre. The challenges—and the opportunities—differ from continent to
continent.
In the UK, its largest market, 90% of HSBC’s transactions are already digital. More importantly for the
bank’s shareholders, roughly 50% of all revenue-generating transactions have shifted online too.
In the branch and back office new technology is also stripping costs, increasing productivity and
boosting fraud and compliance capabilities.
As a result, and for the first time in its five-year history, the annual Economist Intelligence Unit survey
on the future of retail banking shows that bank executives are now more concerned with technology-
driven trends than they are by regulation.
Chart 1
Which trends will have the biggest impact on retail banks in the years to 2020?
(% of respondents)
Changing customer behaviour
and demands 58%
New technologies
(e.g. AI, machine learning, blockchain) 48%
Regulatory fines and
43%
recompense orders
Changing competitive environment
(e.g. new entrants/fintech 36%
disruptors/tech giants)
Changes in the macroeconomic cycle 30%
Data protection legislation 22%
The impact of bank capital regulation 18%
Growing political and
16%
socioeconomic instability
Management of non-performing
15%
loans (NPLs)
PSD2 and/or equivalent open
banking initiatives 13%
Source: The Economist Intelligence Unit.
5 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
The regulatory backlash to the global financial crisis continued to sap banks’ strategic planning
resources until last year. There are still outstanding regulatory issues, particularly around consumer
protection, but they are no longer the priority.
Different drivers, same devices
As can be seen in Chart 1, responding to changing customer behaviour and demands will be the
key trend in all regions in the years up to 2020 and beyond. However, as shown in Chart 2, there are
geographical differences regarding the trends that will have the biggest impact.
The changing demands of customers are more keenly felt in some regions than others. The shift in
customer expectations is most urgent in the Middle East and Africa, where Mobile Money Operator
(MMO) phone-based payment platforms control the majority of the transaction market across the
Sub-Saharan region.1
Chart 2
Which industry trends will have the biggest impact on retail banks in your
country to the year 2020?
(% of respondents)
Asia-Pacific Europe North America Latin America Africa & Middle East
54% 56%
68% 51%
49% 48% 46%
55% 56% 56% 55% 40%
37%
34% 32%
Changing customer New technologies Regulatory fines and
behaviour and demands (e.g. AI, machine learning, recompense orders
blockchain)
48%
40% 39%
37%
33%
31%
28% 28%
26%
23%
1
GSMA, State of the Industry Report on Changing competitive environment Changes in
Mobile Money, 2017. http://www.gsma. (e.g. new entrants/fintech macroeconomic cycle
com/mobilefordevelopment/wp-content/ disruptors/tech giants)
uploads/2017/03/GSMA_State-of - the-
Source: The Economist Intelligence Unit.
Industry-Report-on-Mobile-Money_2016.pdf
6 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
In North America, regulatory fines are expected to have a bigger impact than anywhere else. Federal
and state regulators are acutely aware that consumer protection needs tightening in the wake of recent
scandals, including the opening of as many as 3.5m bogus customer accounts by financial services
company Wells Fargo. In Asia, the lack of top-down regulation may explain why open banking barely
seems to be a concern.
Established players in Latin America say that new entrants are more of a threat than anywhere else
in the world. According to the World Bank, the continent is underbanked.2 This may make it easier
for new non-bank competitors to enter the market with smartphone and cloud technology as
e-commerce takes off.
“Fixing payments from scratch is about social impact. We have customers thanking us for our role in
developing the digital economy. It is a big responsibility,” says Hector Cardenas of Conekta, a Mexican
fintech start-up bridging the gap between unbanked and digital payments.
The Latin American story also underlines an established trend seen elsewhere. Payments, as agreed by
49% of survey respondents, are always where new entrants try to enter the market.
Chart 3
Do you agree/disagree with the following statements?
(% of respondents that agreed)
Platformisation of banking and other service
through a single entry point will steer the market 78%
More payments will flow outside
traditional banking networks 77%
Retail banking will be at least 80% automated with
73%
branches acting as information and engagement hubs
Retail P2P lending will be freely availiable
59%
via banking platforms
Source: The Economist Intelligence Unit.
In fact, that particular battle has already been lost in much of the world. Globally, 77% of respondents
say that by 2020 the majority of payments will flow outside traditional banking networks, with bankers
in Asia-Pacific the most likely to agree.
Product agility has also come to the forefront as a strategic priority for banks, with 52% of respondents
considering it to be their top priority. As banking products and services must now be more agile to
meet changing customer needs, this requires an almost simultaneous improvement to organisational
agility. The pace of technology change is forcing banks to restructure how their business units operate.
They no longer have the luxury of time, or the comfort of rigid business unit silos.
2
World Bank, Global Findex Data. http:// Understanding and implementing new technology and procedures can be costly. As shown in Chart
datatopics.worldbank.org/financialinclusion/
4, customer services bosses are still under pressure to slash costs and improve product margins if
region/latin-america-and-caribbean
banks are to head off the low-cost start-ups. However, there is one area where regulation needs to
7 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
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Chart 4
What are the top strategic priorities of your company in the years to 2020?
(% of respondents)
Improving product agility 52%
Migrating client usage to digital 45%
from physical channels
Cutting costs or improving margins
45%
on retail business lines
Launching API-based/
32%
Open banking strategy
Talent acquisition 28%
Responding to regulatory
requirements 24%
Hyper personalisation—
marketing to the segment of one 24%
Source: The Economist Intelligence Unit.
Chart 5
Which non-traditional entrants to the retail banking industry will be your
company’s biggest competition in the years to 2020?
(% of respondents)
Payment players (e.g., PayPal, Alipay,
Apple Pay, Square, Ripple, WorldPay, 53%
Visa, Faster Payments)
Technology and e-commerce disruptors 29%
(eg, Google, Facebook, Alibaba, Microsoft, Apple)
Neo-banks (e.g. Starling, N26,
29%
Fidor, FiveDegrees, Monzo)
Peer-to-peer lenders 28%
Source: The Economist Intelligence Unit.
be watched, interviewees report. Supervisors are increasingly concerned about the systemic and
personal-data risks posed by digital payments and services.
Surprisingly, survey respondents appear to be more concerned about losing business to new payment
players, including the threat posed by Google, Apple, Facebook and Amazon (collectively known as
GAFA), than they are about ensuring that new payment frameworks are secure. As Chart 1 illustrates,
22% of respondents believe that data protection legislation will have the biggest impact on retail banks
in the years to 2020, while 13% expect it will be the Revised Payment Services Directive (PSD2) and/or
equivalent open banking initiatives.
As we explore in the following chapters, those priorities may need to be reversed—and quickly—to
ensure that banks retain their role of trusted custodian of customer money and data.
8 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
SECTION II: NEW BUSINESS
MODELS: WHAT DO BANKS WANT
TO BE?
“If I were a banker right now, I would be justifiably worried.” Ray
Brash, CEO, Prepay Solutions.
New entrants, new technologies and changing customer demands are forcing banks to rethink, adapt
or completely change their business models, including their digital strategies. As interviewees for this
report point out: “If you don’t have a digital strategy, your bank is already dead.” But what kind of bank
do bankers envision will be the most sustainable and profitable model by 2020?
There appear to be two main options: the first is specialisation by market or product, the second is to
play the fintechs at their own game.
Specialisation by market
When it comes to how banks see their current business model evolving, 61% of global survey
respondents believe the best strategy is to develop a niche that will retain customer loyalty. An example
of this “niche” approach is the “local digital strategy” being followed by Swedish bank Handelsbanken.
This strategy is heavily based on face-to-face and personal contact. Although the bank is using new
technologies, it operates a decentralised banking service based on local managers and staff with real
decision-making powers.
Chief digital officer Stefan Erne says his bank is always looking to improve customer touch points,
whether in a branch or during customer meetings, online or via a call centre, and is not focused on
cutting costs internally.
Handelsbanken is rolling out a new personal finance management tool across Sweden, its biggest
market. Country-specific versions operating to local needs will also be rolled out in other Nordic
countries, the Netherlands and the UK. However, Mr Erne calculates that around 85% of the Swedish
app’s features are reusable in other territories.
Handelsbanken’s view on customer data is also unconventional. While many banks are focusing on
customer data analysis to increase cross-selling rates, Mr Erne has no such intention.
“Branches have the freedom and responsibility to take decisions based on individual customer needs.
We don’t have a centralised segmentation model and we are not pushing products. And we take
security and integrity very seriously and will not monetise the data if customers do not want us to,” he
explains.
Yet all these data do not go to waste. The bank is investing heavily in customer-relationship
management tools. Branch and call-centre staff now know whether a customer tried to sign up for a
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
new product online and then abandoned the process. Next time they meet, in a branch or by phone,
they can offer some friendly assistance.
Specialisation by product
A more radical approach to a niche strategy may be to focus on specific products or features that can
be unbundled from standard banking, savings or loan offerings.
For example, the UK’s Competition and Markets Authority (CMA) now insists that customers are
alerted when they are about to run an overdraft. That could lead to a market for cheaper unbundled
short-term loan providers under open banking. But that market is only viable if costs are low, volumes
high and on-boarding of customers made easy.
MONZO: AIMING FOR SEAMLESS
GROWTH
The UK challenger bank Monzo received its now close to 650,000.
banking licence one year ago, allowing it to
Offering a full banking service will also assist
begin the process of upgrading from offering
the development of new products and
prepaid credit cards to a full current-account
services, according to Mr Blomfield. Lending
service.
is the priority. Monzo has introduced a new
The upgrade was important for both the overdraft facility that allows customers to set
business and the customer base. The prepaid their own overdraft limit, with a simple, single
arrangement was loss-making, says CEO Tom daily fee for using the service.
Blomfield. He calculates that Monzo was losing
The average bank makes £60 on overdrafts,
around £65 (US$91) per year per customer,
half from interest and half from charges. We
mostly owing to the card processing fees that
only need around £20 to be profitable,” says Mr
applied when customers loaded their cards
Blomfield.
with funds.
Giving customers control and transparency
“Now we have a settlement account with the
is vital to building the brand and customer
Bank of England and are a member of Faster
loyalty.
Payments, we can run a current account for
about £20 per year,” says Mr Blomfield. “It is not rocket science. We are not ten times
better than the banks, more like one-and-
With 500,000 cardholders, Monzo was careful
a-half times better. Spending notification,
to test that the transfer was as seamless as
identifying retailers by their logo and budgeting
possible. Since the prepaid scheme was shut
tools are the little things that add up,” suggests
down in April 2018, Mr Blomfield says 94% of
Mr Blomfield.
active users upgraded. Customer numbers are
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
The founding team at Monzo, a UK challenger bank, developed such an “underdraft” concept more
than two years ago. CEO Tom Blomfield says that current technology is not up to the job of creating a
smooth pathway between current account, overdraft and back again.
“The pinch point is always whether you can make it seamless enough. It is tricky to do that right now,”
he says.
Prepaid card providers are already adding new features that allow them to mimic bank accounts. They
are adding a functionality that can easily turn their mobile apps into a full suite of services that appeal
to immigrants, students and those with poor credit histories. As customers become more financially
stable and their needs more sophisticated, then loans, mortgages and investment products can be
layered on.
Ray Brash, CEO of PrePay Solutions, a UK-based one-stop-shop for prepaid programmes, says
this is already happening in the Middle East, where governments, in a crack-down on employment
abuses, now insist that people are paid electronically. As most migrant workers do not have sufficient
credit histories to obtain traditional bank accounts, prepaid card providers have jumped in. Salaries
are loaded onto payment cards, which are then used for transactions. Prepay apps are also used for
remittance payments.
However, many of these workers still prefer cash for day-to-day use. Every payday, therefore, mobile
ATMs are regularly driven across the desert to these migrant-manned oil rigs, says Mr Brash.
Africa offers a vision of how this unbundling can evolve. Over 40% of all adults in Gabon, Ghana, Kenya,
Namibia, Tanzania, Uganda and Zimbabwe regularly use mobile-based money transfer services. There
are now more MMO accounts in Sub-Saharan Africa than traditional bank accounts.
This has completely upended bank-product distribution and design. Banks now have to adapt their
products to the MMO platforms, not the other way round. Every bank in Kenya now offers QR-code
access to the M-Pesa mobile phone-based money transfer and financing service that reaches 70% of
the population.
M-Pesa’s control over payments has forced ever greater numbers of banks to rethink how they reach
their customers. The banks are belatedly devising new automated, digital lending products that pay
directly into M-Pesa accounts.
Those that do not follow suit may find themselves without a viable survival strategy. Those that do will
have to ensure that their service is better than M-Shwari, M-Pesa’s own micro-loan service that has
already been tried by one in four Kenyans.
Ownership and distribution: taking on the apps
The second strategy is to fight the start-ups head-on. Open banking based on API, or application
programming interface—a technology protocol that allows diverse software components to
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
Chart 6
What are your main concerns in relation to API based Open banking?
(% of respondents)
A lack of C-suite understanding
of the issue 40%
Educating customers
on data security 38%
Inability to protect against
35%
cyber attack
Inability of existing IT infrastructure
35%
to support open APIs
Ability to capture customer data 33%
Loss of brand visibility 27%
Lack of API standards 27%
Reputational risk and losing 23%
the trust of customers
A third-party relationship
17%
vulnerability being exploited
Educating staff on data security 14%
Source: The Economist Intelligence Unit.
Chart 7
How do you see your current business model evolving?
(% of respondents)
Developing a niche proposition
for own customers 61%
Maintaining own products and become
an aggregator of third-party products 54%
Opening services to
third-party developers 53%
Banking as a digital ecosystem 51%
Becoming an aggregator of third
party products and services only 40%
Banking as a supermarket 31%
Source: The Economist Intelligence Unit.
communicate—threatens laggards if they only do the minimum in opening up to third-party payment
apps. Their largely indistinguishable products would be reduced to small on-screen icons on aggregator
apps that consolidate financial data from different accounts.
Worse still, banks themselves risk losing highly valuable customer lifestyle data. That’s why the majority
want to be aggregators, not aggregated. The big question is, exactly what type of aggregators do the
12 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
banks want to become? Their answers suggest that respondents are not entirely certain.
Should banks focus on their own products first, linking their customers to accounts they may hold
with other institutions, or should they integrate more aggressively by offering personal finance
management tools?
Big challenges need big solutions, particularly as 31% of respondents want to become a banking
supermarket. They want to offer product comparisons and switching to own and third-party products.
This is especially the case in Europe, where 37% of respondents want to leverage the trust customers
place in them to become a personal provider of choice. As noted in Chart 3, 78% of respondents believe
that “platformisation” of banking and other services through a single-entry point will steer the market.
China’s Alipay and WeChat Pay are already there in many respects. Mobile payments topped Rmb81trn
(US$12.8trn)3 in China over the first ten months of 2017, the absolute majority via Alipay and WeChat
Pay. But their rapid ascent highlights four further issues as incumbents and newcomers battle to
become the platform of choice.
First, regulators are assessing the systemic risks that new technologies present. In China, tech giants
such as Alipay and WeChat must start clearing their payments through a new national clearing centre
later this year, allowing regulators greater oversight and competitors more access to payment-flow
data.
Next, the China experience cannot easily be replicated in other markets. The two Chinese giants grew
in an unregulated space, where incumbents were not necessarily motivated to spot emerging mobile-
payment trends.
Third, customers in other markets who are already well served by existing infrastructure and banking
apps may not be as willing to switch to new platforms. Research by consultancy firm Accenture,
conducted in the run-up to the entry into force of the Revised Payment Services Directive in January
2018, found that 85% of UK consumers were worried about sharing data via open banking.4 As security
concerns grow, the grand ambitions of incumbents, social media giants and fintechs in developed
markets may fall short.
Lastly, banks and their competitors must ensure that platforms, APIs and infrastructure work together.
3
Straits Times, February 19th 2018. http:// Strangely, bankers believe that new API-using apps and services will be more robust than their own
www.straitstimes.com/asia/east-asia/chinas-
systems and procedures: 35% of respondents say they are concerned about the inability of existing
mobile-payment-volume-is-worlds-largest-
at-s167-trillion IT infrastructure to support open APIs. And only 17% are concerned about a third-party relationship
vulnerability being exploited as a result of open banking.
4
Accenture, October 2nd 2017. https://
newsroom.accenture.com /news/
accenture-research-finds-lack-of-trust-
Could banks really win the platform wars?
in-third-party-providers-creates-major-
opportunity-for-banks-as-open-banking-set-
There is some scepticism whether conventional banks stand a chance of becoming the digital
to-roll-out-across-europe.htm
platforms of tomorrow when faced with emerging fintechs or GAFA giants. But in the maelstrom of
13 © The Economist Intelligence Unit Limited 2018G LO B A L R E TA I L B A N K I N G R E P O RT
WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
Chart 8
What is the biggest challenge your company faces concerning data and
third-party access?
(% of respondents)
Conforming to data protection
and privacy regulation 21%
Customer online security and fraud 19%
Real-time processing and transacting 17%
Capturing relevant data required
by regulators and compliance 13%
Turning data into actionable insights 11%
Sharing data with third-party
providers through APIs 8%
Managing siloed data sets 5%
Ensuring data privacy consent
processes are followed 5%
Source: The Economist Intelligence Unit.
change it is easy to forget three simple truths, the first one being that to a large degree such banks
already have the trust, the data and the connections that the fintech newcomers need.
More than 60% of the world’s population over the age of 15 already have relationships with a bank,
credit union or co-operative, far more than have accounts with an MMO or non-bank.5 This is
important, as there is an element of trust and familiarity embedded in deciding where best to place
your cash.
Second, when a bank has the primary current-account or payment-card relationship, it should already
have a good picture of a customer’s life. If it can use transaction data to spot suspicious activity, it
should be able to turn the same information into actionable selling opportunities.
Although these data are often spread across multiple systems, as noted in Chart 4, only 24% of
respondents list hyper-personalisation as a top strategic priority. It appears that banks think they can
do better at guessing what customers want, as only 11% see turning data into actionable insights as
their biggest challenge (see Chart 8).
Third, banks should not overlook the network effect. Global, regional and domestic infrastructure
5
Global Findex Database, 2014. http:// connects everything, from the point-of-sale transaction in the coffee bar to the central bank.
d o c u m e n t s . w o r l d b a n k . o rg /c u ra t e d /
en /187761468179367706/pdf / WPS7255.
These systems are extremely robust. The UK’s Faster Payments, a real-time payment system, reports
pdf#page=3
100% uptime since it was introduced in 2008. Retail and business users do not need to know how it
6
Faster Payments: Total payments between works, but they had sufficient trust in it to send £123bn (US$171bn) through the system in February
launch on May 27th 2008 and February 28th
2018 were 8.8bn, worth £6,7218 bn. February 2018 alone, a 23% increase on 2017.6 In much of the world, fintechs may find it hard to replicate what
2018, volume 148.6mn (+23% year on year). already works and ensure that their new models are financially viable.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
EUROPE: WIDE OPEN
Open banking, which requires banks to share Would a big cyber-attack from a third party to
customer data and allows third parties to which their bank has opened its data galvanise
initiate transactions, is becoming a reality from management into action? Perhaps not: only
Asia to Latin America. But when asked which 22% of respondent identify data protection
trends will have the biggest impact on retail as a strategic priority. North American
banks in their country in the years to 2020, only respondents are the most attuned to data
13% of global respondents cite the challenges concerns, with 30% citing it as a priority, but
and threats posed by open banking. Even more given the real threat posed by cyber criminals,
concerning is the finding that less than 6% of this is surprisingly low.
risk personnel see the riskiness.
The fact that only 24% European respondents
Interviewees warn that the industry is seriously consider data protection to be one of the
ignoring the impact, particularly in Europe, trends that will have the greatest effect is
where the new Payment Services Directive also worrying. According to security experts,
(known as PSD2) came into force in January this figure should be far higher. The EU’s new
2018. When asked about their main concerns General Data Protection Regulation (GDPR),
in relation to API-based open banking, 40% due to come into force in May 2018, will test
of survey respondents say that C-suite all companies in every sector, but given the
understanding of what is at stake is the biggest amount of personal data they hold and must
impediment to open banking being taken now share, banks are particularly vulnerable.
seriously by incumbent banks.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
SECTION III: DIGITAL
TRANSFORMATION: MOVE FAST
BUT DON’T BREAK ANYTHING
Established banks have many advantages in the platform wars, but there is no question that winning
them would require substantial transformation.
The scale of the transformation ahead is evident from the survey. Nearly three-quarters of survey
respondents think retail banking could be largely automated by 2020, over half (56%) believe
customers will forgo human contact if services are free or cheap, while 64% say that fewer than 5% of
retail transactions will be in cash in three years’ time. A disturbing 47% believe that a cyber-attack will
have caused at least one systemic bank failure.
Chart 9
Do you agree/disagree with the following statements? By 2020……
(% of respondents)
Agree Disagree No opinion
56% 38% 64%31%
6% 5%
Customers will be willing to forgo Cash will represent less than
human contact if services are cheap or free 5% of all retail transactions
73% 47% 39%
23% 13%
4%
Retail banking will be at least 80% A cyber-attack will have caused
automated with branches acting as at least one systemic bank failure
information and engagement hubs only
Source: The Economist Intelligence Unit.
In undertaking this transformation, banks are often at a disadvantage. Unlike Facebook with its old
mantra of “Move fast and break things”, banks must move fast, but they cannot sacrifice security or
trust while doing so.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
Banks must therefore find ways to undergo a rapid organisational and business-model transformation
while preserving the qualities that customers know and respect. That means updating the branch,
transforming the IT infrastructure and collaborating with the ecosystem of fintechs even as they
present competitive challenges.
The future of the branch
Branches are disappearing quickly as customer behaviour changes. The ratio of branches per 100,000
of the population fell by 44% in Norway and by nearly 65% in Finland between 2010 and 2016 as
payment apps have led to less reliance on cash.7
The volume of Swedish currency in circulation has halved over the last decade, with the fall accelerating
in the last two years.8 The banking industry’s Swish app is now so ubiquitous that many shops and bank
branches no longer accept notes and coins. This has politicians and Stefan Ingves, the governor of
Sveriges Riksbank, the central bank of Sweden, worried. When economic activity flows through apps
run by commercial banks, the central bank has less power over monetary policy as it cannot remove
notes from circulation. Those app operators also control access for shoppers, potentially impacting the
elderly and marginal members of society who may not have smartphones.
Will payment apps kill off the branch entirely? Respondents and interviewees think not. Over 61% of
respondents still see a place for the traditional transaction-based branch model, nearly twice as many
as those who think it will be dead by 2020.
The number of branches and call centres that remain will depend on changing customer demand. But
the technology underpinning physical and online channels is developing rapidly.
A DIGITAL GREATER CHINA
Asian banks are racing to digitalise their “Hong Kong and Taiwan have also
entire suite of financial products. However, demonstrated great appetite for other fintech
as Standard Chartered Hong Kong found out, solutions, such as online stocks or foreign-
usage patterns vary across the Greater China exchange trading, while people in Shanghai
region. tend to use more real-time online support,
live chat and video banking,” says Carol Hung,
The bank recently surveyed online and mobile
7
International Monetary Fund, the bank’s chief information officer.
banking habits in Hong Kong, Shanghai and
Financial Access Survey. http://data.imf.
org /?sk=E5DCAB7E-A5CA-4892-A6EA- Taiwan. Shanghai has a significant lead in But wherever they are, customers are wary
598B5463A34C terms of mobile-payment users. It also has a about their security. In Hong Kong, 31% of
8
Sveriges Riksbank, Statistics on notes higher adoption rate for person-to-person survey respondents say that security and data
and coins. https://www.riksbank.se/en-gb/ payments. leakage are key concerns that hinders them
statistics/payments-notes-and-coins/notes-
from using fintech.
and-coins/
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
Chart 10
Where is your company focussing its digital investment?
(% of respondents)
Cyber security 71%
Individual delivery capabilities
(through internet, mobile devices, etc.) 54%
Improving performance and scalability
48%
through cloud-based technologies
Modernising both front and back office systems
37%
to support end to end digital customer journeys
Developing a new digital proposition
as a standalone entity 33%
Developing AI platforms
like digital advisors 32%
Omni-channel capabilities 26%
Advanced and predictive analytics 18%
Source: The Economist Intelligence Unit.
Redirecting digital investment
By now most banks have either fully or partially completed standardising the look and feel of their
services across different platforms; it is no longer the most important aspect of their digital investment.
Technology budgets are now being directed to mobile and other internet-connected channels, with
mobile being the focus of 54% of respondents. Banks are investing heavily in cloud-based technology,
with 48% of investment focused there, and also in modernising front- and back-end systems to ensure
that processes run more smoothly and economically (cited by 37% of respondents).
According to Hans Tesselaar, executive director of the Banking Industry Architecture Network (BIAN),
an international association of banks, software vendors and service providers, open banking will lead to
a rethink of how banks structure their IT and digital investment. He believes that as APIs become more
complex in their functionality, banks will need to rationalise their IT infrastructure.
“Fintechs are focused on the simplest utility apps that ask a question and the bank gives an answer,” he
explains. “Initiating a loan through an API will be much harder.”
Dancing with fintechs
Most banks have long since recognised that if they are to keep pace with innovation in the sector, they
must work with the fintechs, even if some pose competitive challenges. Many have invested in fintech
start-ups directly or bought them outright. Others are forging partnerships, in some cases under
agreements that prevent the fintechs from sharing ideas with competitors.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
Tie-ups vary in size, focus and structure. In Australia, Westpac recently bought an equity stake in
flexible payments platform Assembly Payments so that it can integrate payment terminals and retailer
point-of-sale software.9 Singapore’s OCBC Bank has set up an artificial intelligence (AI) laboratory after
collaborating on suspicious transactions with ThetaRay, a cyber security and data analytics company,
and a chatbot for loan queries developed by fintech start-up CogniCor.10 Innovative banks are even
setting up new entities to sell their fintech expertise to others. LHV of Estonia already works with
remittance giant Transferwise and cryptocurrency exchange Coinbase. The bank is now opening a UK
branch to attract more partners.11
The aim of forging closer ties with emerging fintechs is not necessarily to be first to market with a killer
app: education and exposure to the digital way of working are just as important.
Startupbootcamp Fintech Mexico City is a programme that aims to put 11 hopeful fintechs on the
road to success by providing access to resources and banking expertise. It is funded by established
companies including HSBC, Visa and small business lender BanRegio, and according to the
programme’s director, Eduardo Morelos, and Andres Fontao, managing director at Finnovista, a
Mexico-based impact platform improving access to digital finance, bank bosses are eager to attend
sessions with software developers.
“Our sponsor firms have gained valuable insights into artificial intelligence and big data,” says Mr
Morelos. “A number of their chief executives have had hands-on experience at the fintech frontline."
9
Financial Review, April 3rd 2018. http://
www.afr.com/business/banking-and-finance/
financial-services/westpac-strikes-deal-with-
assembly-payments-20180329-h0y4gh
10
Enterprise Innovation, April 4th 2018.
https://www.enterpriseinnovation.net/
article/ocbc-banking-ai-future-revenue-
streams-1961029509
11
Finextra, March 14th 2018. https://www.
finextra.com/newsarticle/31806/estonias-lhv-
to-open-uk-bank-to-serve-fintech-industry/
wholesale
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
PEPPER: STARTING FROM
SCRATCH
Buying, attracting or nurturing new innovation have gone down well too, especially when
hubs and centres seem to be the easier options targeted at lifestyle and behaviour.
for an established bank. However, only 22% of
A new group payment function makes paying
survey respondents agree that if your existing
the bill easier when friends regularly meet
banking and IT structure is holding you back,
for dinner. And a new promotion on tuition
just build a new one.
fees has pleased universities and students.
Israel’s Bank Leumi thinks otherwise. It has big Applying is quick, and universities receive the
plans for Pepper, its stand-alone mobile-only money directly as soon as each tuition-fee loan
bank launched in 2018. It has also launched is approved.
Pepper Pay, a person-to-person payment app
Pepper’s success validates the decision
that is open to everyone, including customers
to launch a stand-alone venture, says Mr
who bank with competitors.
Buganim. One day Pepper could even swallow
Pepper Pay has proven to be remarkably its parent. Rather than rebuild Leumi’s existing
popular, with hundreds of thousands of traditional banking operations, customers
customers already signed up. Although Pepper could be migrated across.
bank’s customer base is smaller, over 1,000 new
“We would not be able to run so fast on the
account holders are joining each week.
old infrastructure,” admits Mr Buganim. "That's
Ilan Buganim, Bank Leumi’s chief technology why we built Pepper on a new and separate
officer, has been surprised by exactly who is platform.”
signing up. Although Pepper firmly targets
International expansion could also be on the
millennials, 40% of the banking app’s clients
cards. However, according to Mr Bugagnim,
are over the age of 30.
Europe’s mobile market is already saturated.
Speedy development and personalisation Developing markets and the US offer far more
count. Accounts can be opened in less than interesting greenfield opportunities.
eight minutes, says Mr Buganim. New services
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
SECTION IV: ARTIFICIAL
INTELLIGENCE IS WATCHING AND
LEARNING
Automation looms large on the horizon for retail banks: as previously discussed, nearly three-quarters
of survey respondents think that retail banking could be mostly automated by 2020.
The increasing volume of online and mobile transactions, new account sign-ups and the growing
realisation that these data can be profitably used means that banks need to continually increase
investment into newer technologies to make these channels safer as well as seamless.
Artificial intelligence: coming to the forefront of the banking
experience
Artificial intelligence is becoming a key part of the new technology mix. It is emerging at all levels of
banking, from the customer front-end to the behind-the-scene processes and compliance procedures.
Done well, customers should not notice they are talking to a machine—or that a machine is watching
and learning from their actions. Whether customers should be informed of who, or rather what, they
are interacting with is still debatable.
Chart 11
What do you believe will be the most valuable use of Artificial Intelligence for
retail banks?
(% of respondents)
Improving the user experience
through greater customer 22%
personalisation capabilities
Greater customer engagement 21%
Customer fraud detection 20%
Robot process automation to
on-board customers more easily 14%
by creating a single digital identity
Regulatory compliance 12%
Customer profiling— 7%
Micro segmentation
Voice recognition banking 5%
Source: The Economist Intelligence Unit.
Survey respondents see most AI benefits concentrated on the existing customer, with more than one
in five saying that personalising the user experience and boosting customer engagement will be the
most valuable use of AI for retail banks.
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Of the respondents to chart 11, it was private banks that are particularly keen on developing AI-based
robo advice capabilities. This is not surprising, considering that relationship managers comprise a
significant portion of their cost base. These high staff costs often keep minimum investment criteria
beyond the reach of the fast-growing affluent mass markets in Latin America, Africa, the Middle East
and Asia.
According to the survey, IT executives are the most likely to believe that the most valuable use of AI
will be for on-boarding customers (cited by 28%, twice the overall average). Their colleagues in risk and
customer services are less enthusiastic, with only 12% happy to employ AI to facilitate product sales.
Even fewer see opportunities for AI to assist in micro-targeting.
Artificial intelligence: should customers be worried?
Although the banks think that AI holds significant potential for easing processes safely and effectively,
it is clear that they believe customers still have some doubts.
Chart 12
What do you think are customers biggest concerns related to Artifical
Intelligence?
(% respondents)
Uncertainty about security of their
personal financial information 64%
Lack of privacy 64%
Lack of clarity about how the data will
60%
be used
Understanding the difference between
‘guidance’ and regulated advice 57%
That personal choice will be removed
as they will only be shown information 19%
based on previous behaviour
Source: The Economist Intelligence Unit.
AI raises significant issues about customer data, particularly in relation to privacy, personal information,
and how these data are used.
Whether used for verification and fraud detection, transactions or product sales, banks will have to
justify how AI and automated systems make a decision, according to our interviewees.
“You have to be transparent on how you process, store and use data. If you do something wrong,
you will be caught,” says Roberto Valerio, chief executive officer at RISK IDENT, a fraud-prevention
software provider. From a compliance point of view, understanding the difference between “guidance”
and “regulated advice” can be a fine line. Our survey indicates that North American banks are the most
likely to fear fines for getting it wrong, with 56% of respondents indicating that it will have the biggest
impact on retail banks.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
The advice to apply caution when using these terms is appropriate: banks continue to pay out billions
in recompense for mis-sold investment, savings and mortgage products. Nobody wants more
multimillion-pound fines if AI proves defective too.
However, these compliance challenges could actually be to the advantage of the banks. They have
decades more experience than the fintechs. The gap may become even more apparent as new players
move on from relatively simple transactions, prepaid cards and displaying aggregated spending data.
For them, the regulatory challenge of providing full-service banking will be complex and expensive.
A bank is far better equipped to spread the cost of compliance over a large customer base. Having
lived through—and dealt with—new technologies in the past, it also has more experience in problem-
solving.
“It plays to our advantage as time goes on. As the start-up companies try to add incremental services,
do more international transfers or loans on the back of a credit card, you will have more and more of
these challenges that have higher fixed costs,” says HSBC’s Mr Bottomley.
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WHOSE CUSTOMER ARE YOU? THE REALITY OF DIGITAL BANKING
SECTION V: SECURITY: AN
INCREASINGLY GLOBAL CONCERN
Security now has to be considered from many different angles. It is no longer just an internal issue for
banks. The need to protect customers and their data is becoming increasingly complicated as services
as well as customers become ever more globalised. New regulations are not only changing the banking
infrastructure—they are changing who banks actually serve and how they can serve them.
Regulation: security or simplicity?
Open banking will change the nature of who can initiate payments that connect to these networks,
and how. But unless new market entrants apply for full banking licences and, in some cases, a clearing
account with their central bank, they will have to rely on existing participants for access.
Chart 13
What are your biggest concerns regarding regulation and standards?
(% respondents)
Inconsistent global data protection
requirements 52%
Data security requirements around
cloud-based services 34%
Lack of international standards for APIs 28%
Rulers around transaction initiation
26%
and processing
Differing authentication requirements
to create digital identities 24%
Regulatory sandboxes that allow new
entrants to try new products and 21%
services creating and unfair market
Lack of clarity on third-party liability 12%
on open API data
Source: The Economist Intelligence Unit.
European regulators are clear that banks will be held responsible for incorrect payments, even when
initiated by a third party. Opening up to competitors is important, but so is security. For many banks the
challenge may be to tackle these simultaneously.
Broadly, banks are more concerned about protecting customer data than about opening up to APIs,
the building blocks that allow apps to talk to banks to get the information they need.
Interviewees suggest that most banks are also clear on focusing on security first. If customers lose trust
or money, they will take their business elsewhere. However, as seen in the US, regulators are likely to
fine the banks in question, even when they are not entirely to blame for mistakes. It is clear that North
American bankers are worried more about regulatory action (31%) than by angry customers (13%).
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There are genuine concerns about the real cost of innovation at a global level. More than half (52%) of
survey respondents believe that global data protection standards are inconsistent.
Because the overwhelming bulk of retail bank transactions remain domestic, the absence of
international API standards is raised as a concern by only 28% of respondents. But even in Europe that
may increase as aggregators (and the aggregated) spread their business.
It is highly likely that open banking will eventually expose system weaknesses. Uncertainty about third-
party security as well as the ongoing need to educate customers and staff on data security will help
to ensure that banks will continue to focus on beefing up their defences. According to 71% of survey
respondents, cyber security already accounts for the biggest chunk of their digital investment spends.
Deploying that investment wisely depends on where banks believe the weaknesses lie.
For 38% of survey respondents, customers are the weakest link and therefore need to be educated on
how to bank safely. Thankfully, bank staff is more aware of data security, with only 14% of respondents
citing it as a key concern.
IF THE FACE FITS
A look or swipe is all you need to access your banking on top of “knowledge” (eg, password) or “possession”
app. However, few users know just how complex (eg, smartphone, token), and will need to comply with
biometric security could be. New Android devices and stricter security requirements.
iPhones are shipped with embedded fingerprint and
Mr Eroglu believes banks, not the device manufacturer,
face-recognition technology. When users register their
should have control over the creation of biometric
unique physical features, images are encrypted and
security credentials, collection and validation of
held locally on their devices. At present, many bank
biometric data.
apps, in effect, hand their login security to the giants
of Silicon Valley. Banks also should combine multiple biometrics
characteristics and not rely on a single biometric
Hakan Eroglu, executive, digitisation in payments and
feature only. A copied fingerprint in a fingerprint-only
banking at consultancy firm Accenture, thinks that may
solution could lead to your account being emptied.
not be enough. Banks will need tougher authentication
Adding behavioral data such as keystrokes or finger
systems, especially when forthcoming European
pressure on the screen is key for a more secure and
Regulatory Technical Standards (RTS) on Strong
convenient solution, he suggests. But banks should not
Customer Authentication (SCA) and Secure Open
store any biometric raw data directly on their systems.
Standards of Communication (CSC) under PSD2 come
Instead, they should build templates to match data
into force in September 2019.
from the device for a good fit. Security and convenience
According to the RTS, banks will be allowed to provide need to be kept in balance. "Frictionless customer
authentication methods based on biometrics as well, experience in secure payments is key," says Mr Eroglu.
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